Abstract

This paper analyzes the endogenous formation of a partnership as the trade-off between efficiency gains and a 'cost' associated with the partial loss of control over the decisions the partnership takes. For instance, by forming a monetary union, countries benefit from a more coordinated monetary policy. However, due to the partial loss of control over the union decision, the policy implemented might differ from the policy a member would have taken on their own. We interpret this possible difference as a cost. We notably show that individuals with 'similar' characteristics form a partnership, and the more diverse the characteristics, the smaller the partnership size.